Non-Traded REITs Failing in Face of Industry, Regulatory Challenges, High Commissions

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Industry wide, non-traded real estate investment trust (REIT) sales are falling significantly due to widespread legal and regulatory issues, according to an Investment News report.

For instance, sales of full-commission REITs, which charge a high rate of commission (10%, with 7% to the adviser and 3% to his/her firm), in January-May 2016 were down over 70%, compared to the same period in 2015.

LPL Financial, a firm which in its past boasted a rather robust REIT repertoire, claimed total alternative investment sales commission revenue in 2016's first quarter of $7.8 billion, which represents a notable 86.7% decrease when compared to Q1 2015. In its second quarter of 2016, LPL's alternative investment commissions totaled $9.1 billion, compared to $32.0 billion in Q2 2015, or a nearly $21 billion drop-off.

This corresponds with a longer downward trend concerning total equity raised through non-traded REIT sales, which has steadily declined by about $5 billion per year since a high of $20 billion in 2013. With total non-traded REIT sales projected to reach no more than $6 billion in 2016, that amounts to about 25% of 2013 levels.

When it comes to regulation, a new FINRA rule for illiquid investments and REITs is forcing advisers and broker-dealers alike to become more transparent and upfront with customers regarding pricing and commssions, industry executives say is also causing decreased sales, partially due, again, to high commissions.

Finally, FINRA, SEC, and even FBI are stepping up enforcement and legal action for non-compliant or malfeasant REIT dealers. In February, the FBI raided United Development Funding, sellers of the Ponzi-like UDF IV REIT. At the time, the FBI raid exacerbated a drastic decrease in UDF on NASDAQ before trading was halted, while multiple media outlets reported the Ponzi scheme nature of UDF's dealings with one analyst describing UDF as, "Total Ponzi scheme, worth zero."

Earlier this summer, FINRA fined WFG Advisors $100,000 for overcharging customers in alt investments, including REIT sales, noting that the firm overbilled 35 accounts a total of nearly $35,000 in excessive advisory fees.

If you have invested with a broker or financial adviser in the United Development Funding (UDF) REIT, or any UDF or similarly unscrupulous products, or with any dealer whose excessively high commissions, fees, or whose improper and unsuitable recommendation to pay such a disproportionate or excessive commission or fee has proven harmful to your interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.